Rail India Technical And Economic ... vs Ravi Constructions And Anr. on 19 October, 2001

[Cites 25, Cited by 16]

Karnataka High Court

Rail India Technical And Economic ... vs Ravi Constructions And Anr. on 19 October, 2001

Equivalent citations: 2002(1)KARLJ419, AIR 2002 (NOC) 30 (KAR), 2002 AIR - KANT. H. C. R. 272, (2002) 1 KANT LJ 419, (2002) 2 ICC 719, (2001) 45 ARBILR 436

Bench: R.V. Raveendran, V.G. Sabhahit

JUDGMENT
 

  Raveendran, J.

1. The appellant, respondents 1 and 2 were respectively petitioner and respondents 1 and 2 in Arbitration Case No. 42 of 1998, on the file of City Civil Court, Bangalore. For convenience the appellant will also be referred to as the 'employer' or 'RITES'; the first respondent will also be referred to as the Contractor; and the second respondent will also be referred to as the Arbitrator.

2. RITES invited tenders by tender notice dated 1-12-1993 for construction of "daily market building (civil works)" at Chintamani. The Contractor submitted its tender. The employer (RITES) accepted the said tender and awarded the work to the Contractor, as per letter of acceptance dated 14-2-1994. In that behalf, an agreement dated 18-3-1994 was entered into between RITES and the Contractor for the execution of said work the contract value being Rs. 1,03,18,371.00. The tender notice, letter of acceptance and the agreement made it clear that RITES was acting on behalf of the Town Municipal Council (TMC), Chintamani. As per the contract, the contractor had to execute the work within 15 months from the date of letter of acceptance, that is on or before 14-5-1995. In consideration of execution and completion of the work, RITES agreed to pay to the Contractor the respective rates contained in the bill of quantities, with such other sums as may become payable to the Contractor under the contract. The agreement also provided that the tender notice, letter of acceptance, general conditions of contract, special conditions of contract, technical specification and drawings, correction slips 1 and 2, schedules and the letters exchanged between RITES and the Contractor between the date of tender and the contract, shall form part of the contract. Clause 65 of the General Conditions of Contract refers to settlement of disputes. Sub-clause (2) of Clause 65 provides for settlement of disputes by arbitration.

3. The Contractor claims that in terms of the contract, it mobilized the men, machinery and material to execute the work in right earnest, but the work could not be completed within the stipulated period or thereafter due to the following, amongst other breaches on the part of RITES: (a) trespassing by local market vendors, preventing execution of the work and consequential failure by RITES to make available uninterrupted possession of work site; (b) delay in cutting and removing the trees which existed in the work site; (c) delay in delivering the possession of the portion of site meant for 'E' block on account of existence of petty shops; (d) delay in removing the sanitary main pipelines crisscrossing under the work site and high tension power line running across above the work site, till September 1994; (e) failure to provide access for trucks of the Contractors to the work site by removing the encroachers on the approach road; (f) delay in giving designs and drawings for the roof beams of 'G' and 'H' Blocks till September 1994 and for giving roof slab re-enforcement details for casting slab concrete of 'J', 'G' and 'H' Blocks till December 1994; (g) failure to give detailed drawing for 'J' block even till the end of stipulated period for completion of the contract; (h) delay on account of change of design in respect of Blocks 'A', 'B', 'G' and 'J' by increasing the height; (i) failure to pay mobilization advance in terms of Clause 58(5) of the General Conditions of Contract; (j) inordinate delay, ranging from 3 months to one year, in making interim payments for the work done in accordance with Clause 58(3) of the General Conditions of Contract, resulting in arrears of Rs. 38,85,390.01 becoming due in respect of RA Bill Nos. 10, 11 and 12 and Price Adjustment Bill Nos. 1 to 5 and Bill for Extra Items; (k) failure to settle the equitable and mutually agreed rates for extra work and variations in quantities of items beyond the stipulated limit. The Contractor alleged that on account of said breaches and failure to make payments in time, the work came to a grinding halt after nearly 85% of the work had been executed; and in the meanwhile trespassers illegally entered the work site and occupied the premises and when the Contractor informed RITES by letter dated 9-9-1996 about the problems, RITES by letter dated 20-1-1997, foreclosed the contract with immediate effect.

4. In view of the above, the Contractor made 15 claims against the employer, as per letter dated 27-2-1997, addressed to RITES' Manager (Works). As the claims were not settled, the Contractor raised disputes in regard to the said claims, and ultimately, the second respondent was appointed as sole Arbitrator to settle the disputes.

5. Before the Arbitrator, a preliminary hearing was held on 11-9-1997. The claim statement, with supporting documents, was filed by the Contractor on 9-10-1997; the counter-statement with documents were filed by RITES, on 26-11-1997; the rejoinder with documents were filed by the Contractor and on 8-12-1997; and hearings were conducted on 7-1-1998, 8-1-1998, 12-3-1998, 20-4-1998, 21-4-1998 and 8-6-1998. The documents filed by the claimant were marked as C1 to 46, C43-A, 44 and 46-A; the documents filed on behalf of the respondent were marked as R, R1 to 15 and R(ARG); and the contract documents were marked as A, A1 to 3. All the documents were marked by consent. On 8-6-1998, both the parties submitted a joint memo, stating that they were given full opportunity to submit arguments and had nothing more to submit. Thereafter, the Arbitrator made and published a reasoned award dated 20-8-1998.

6. The particulars of the claim and the award, in brief are as follows:

Claim No. Description of claim Award of Arbitrator 1 Release of Rs. 38,85,890.91 due towards outstanding payments for the work done with interest at 24% per annum compounded quarterly from the dates the amounts actually became payable to the date of payment.

(a) Rs. 16,95,999.06was awarded, as detailed in Annexure-CL 1 to Award.

(b) Rs. 7,59,647.00 asinterest at 18% per annum on delayedpayments.

Release of retention money of Rs. 10,32,000/- and a direction to RITES to release the Bank guarantee submitted in respect of half amount of security deposit.

Rs. 10,32,000/- was awarded with a direction to RITES to release the Bank guarantee submitted by the claimant in respect of half amount of security deposit.

Compensation for the damage suffered by contractor by awarding interest at 24% per annum compounded quarterly on the delayed payments from the dates they actually payable to the dates of payment (as detailed in the claim statement).

Rs. 2,25,167. 14 awarded as detailed in Annexure-CL3 to the award.

Equitable rates plus price adjustment charges in terms of Clause 68(1) of the General Conditions of Contract for the items of work whose quantities have exceeded by more than 30% over the tendered quantities (as detailed in the award).

Rs. 21,79,990/-awarded as detailed in Annexure-CL4 to the award.

Equitable rates plus price adjustment charges in terms of Clause 68(1) of the General Conditions of Contract for the entire quantities of work executed under the items in Bill of quantities whose quantities have fallen below 30% limit stipulated under Clause 52(3) of the General Conditions of Contract, as detailed in the award.

Rs. 6,50,090/- awarded as detailed in Annexure-CL5 to the award.

Equitable rates for the extra items of work executed plus price adjustment charges in terms of Clause 68(1) of the General Conditions of Contract, as detailed in the award.

Rs. 6,13,296.52 was awarded as detailed in Annexure-CL6 to award.

Equitable rates plus price adjustment charges in terms of Clause 68(1) of the General Conditions of Contract for the items of work executed in 'A', B', and 'J' Blocks in view of substantial change in the scope of work, as detailed in the award.

Rs. 6,57,635/-

was awarded as detailed in Annexure-CL7.

Compensation for loss of profit suffered by the Contractor on account of deprivation of substantial portion of execution of work due to defaults and breach of contract committed by RITES (Claim: Rs. 3,61,395/-).

Claim rejected.

Equitable rates plus price adjustment charges in terms of Clause 68(1) of the General Conditions of Contract for the quantum of work executed under different items in the bill of quantities in the prolonged period beyond the stipulated date of compensation (as detailed in the award).

Claim rejected.

Compensation for loss on account of the idle men and machinery suffered by the Contractor on account of defaults and breach of contract committed by RITES (Rs. 30,00,0007/-.

Rs. 15,00,000/-

was awarded.

Reimbursement of extra expenditure incurred by the claimant on additional monthly overhead charges in the prolonged period from 13-5-1995 to 20-10-1997 at the rate of Rs. 1,03,138.00 per month (Claim: Rs. 20,63,660/-).

Rs. 13,00,000/-

was awarded.

Reimbursement of extra expenditure incurred on extending the insurance coverage for the work beyond the originally envisaged period (Claim Rs. 34.086/-).

Rs. 34,086 was awarded.

Reimbursement of extra sales tax from Contractors bills, which was increased by the State subsequent to submission of the tender.

RITES directed to recover sales tax on works contract at 2%(two per cent only) from the work done bills with a further direction to refund extra sales tax recovered over the above 2% (two per cent), if any, to the Contractor.

Compensation for the cost of materials stolen away from the work site (Claim: Rs. 30.000/-).

Claim rejected.

Reimbursement of the extra expenditure incurred in rehabilitating and reestablishing its labour and machinery and establishment of some other jobs due to the foreclosure of the contract by RITES (Claim: Rs. 5.00.000/-).

Rs. l,00,000/-awarded.

Claim for award of interest at 24% on all the amounts claimed from the dates they became payable to the dates of reference.

Claim for award of interest at 24% per annum compounded every three months on all the amounts awarded from the date of reference to the date of award; and Interest awarded at the rate of 18% (Eighteen per cent) per annum simple, on all the amounts awarded from 21-1-1997 to the date of award (20-8-1998) except on the amounts awarded under Claim Nos. 1(b) and 3.

Claim for award of interest at 24% per annum compounded every three months on all the amounts awarded from the date of award to the date of decree or payment whichever is earlier.

The Arbitrator also directed each party to bear its own cost of arbitration.

7. Feeling aggrieved, RITES filed a petition under Section 34 of the Indian Arbitration and Conciliation Act, 1996 (for short, the "Act") in the City Civil Court, Bangalore on 16-11-1998 for setting aside the award passed by the Arbitrator. The said petition was numbered as AC No. 42 of 1998. The Contractor resisted the same. After considering the oral and written arguments, the City Civil Court passed an order dated 30-3-2000, dismissing the petition. It formulated the following four points for consideration and answered them in the negative:

(1) Whether the petitioner proves a privity of contract between the first respondent-M/s. Ravi Constructions and TMC, Chintamani?

(2) Whether the petitioner proves that the agreement between the petitioner and the respondent 1 is bad in law for nonjoinder of TMC, Chintamani as a party to the agreement?

(3) Whether the petitioner proves that the composition of Arbitral Tribunal is in violation of the arbitration clause?

(4) Whether the petitioner proves that the award is arbitrary, illegal?

8. Feeling aggrieved, the employer has filed this appeal urging the following three contentions:

(i) The arbitration agreement between the parties prescribes the appointment procedure; and the appointment of Arbitrator is in violation of said arbitration procedure and therefore the award was liable to be set aside under Section 34(2)(a)(v) of the Act;

(ii) RITES was acting as an agent of TMC, Chintamani in awarding the work and getting the work executed. Therefore, TMC, Chintamani was a necessary party to the arbitration proceedings as the TMC was liable to make payment.

But the Contractor failed to implead the TMC as a party and wrongly made the claim against RITES who was merely an agent and not against the TMC, Chintamani, who was the principal. The claim was thus contrary to Section 230 of the Indian Contract Act, 1872. Therefore, the award was liable to be set aside under Section 34(2)(a)(i) and 34(2)(b)(i) and (ii) of the Act; and

(iii) That the award made by the Arbitrator on the several claims was erroneous, illegal and opposed to the public policy of India and liable to be set aside under Section 34(2)(b)(ii) of the Act.

9. In view of said contentions, the following three points arise for consideration in this appeal:

(a) Whether the appointment of second respondent as Arbitrator was in violation of the appointment procedure contained in the arbitration agreement and therefore the award is liable to be set aside under Section 34(2)(a)(v) of the Act?

(b) Whether non-joinder of TMC, Chintamani as a party to the arbitration proceeding and whether making an award against RITES is contrary to law (Section 230 of Indian Contract Act, 1872); and therefore the award is liable to be set aside under Section 34(2)(a)(i) and (b)(i) and (ii) of the Act?

(c) Whether the award made on the claims of the Contractor and grant of interest is liable to be set aside as being erroneous, illegal and oppose to public policy of India.

Re: Point (a):

10. The relevant portion of Clause 65(2) of the conditions of contract relating to arbitration, containing the appointment procedure is extracted below:

"All disputes or differences in respect of which the decision is not final and conclusive, shall be referred to for arbitration to a sole Arbitrator appointed as follows:

Within 30 days of receipt of notice from the Contractor of his intention to refer the dispute to arbitration, the General Manager (Project) shall send to the Contractor a list of three officers of the rank of Superintending Engineer or higher who have not been connected with the work under this contract. The Contractor shall within 15 days of receipt of this list, select and communicate to the General Manager (Project) the name of one officer from the list who shall then be appointed as a sole Arbitrator. If the Contractor fails to communicate his selection of name within the stipulated period, the General Manager (Project), shall without delay select one officer from the list and appoint him as a sole Arbitrator. If the General Manager (Project) fails to send such a list within 30 days as stipulated, the Contractor shall send a similar list to the General Manager (Project) within fifteen days. The General Manager (Project) shall then select one officer from the list and appoint them as a sole Arbitrator within 15 days. If the General Manager (Project) fails to do so the Contractor shall communicate to the Project Engineer the name of one officer from the list, who shall then be the sole Arbitrator".

11. The employer (RITES) contends that when the Contractor issued a notice dated 29-5-1997, seeking reference to arbitration and calling upon the General Manager (Projects) to send a panel of three officers, RITES had in fact sent a panel of three names to the Contractor on 1-7-1997; that instead of selecting one of the names from the said panel, the Contractor untenably contended that the employer had failed to send a panel of names within 30 days and sent its panel of three names; that even when RITES pointed out by letter dated 2-7-1997 that the procedure adopted by the Contractor was erroneous, the Contractor persisted in its stand and proceeded to appoint the second respondent as sole Arbitrator by letter dated 16-7-1997, from the list of three names mentioned in its (Contractor's) panel. It is contended that the appointment of second respondent is therefore illegal and that as per the appointment procedure, the Contractor ought to have selected one of the three names from the panel of names notified by RITES.

12. We have carefully gone through the appointment procedure contained in the arbitration agreement and find that there is no merit in the contentions of the employer. It is not in dispute that the Contractor served a notice dated 29-5-1997 seeking arbitration and asking for the names of three officers, in terms of the arbitration agreement. This letter was served on the employer on 30-5-1997. Under the appointment procedure, the General Manager (Project) had to send a list of three officers to the Contractor within 30 days of the receipt of such notice, that is on or before 29-6-1997. RITES however, sent its panel after the expiry of 30 days that is 1-7-1997. On the expiry of 30 days from 30-5-1997, in terms of the appointment procedure, RITES forfeited its right to send a panel of three names (for selection of one of them by the Contractor as Arbitrator) and the panel sent by RITES on 1-7-1997 was thus invalid. On the other hand, the Contractor became entitled to send a panel of three names to RITES so that RITES could select one name from such panel. RITES had to select one from among three names suggested by the Contractor within fifteen days from the date of receipt of panel of names from the Contractor. The Contractor sent its panel of three names (Sri B.C. Basavaraj, Engineer-in-Chief, Public Health Engineering, A.N. Seetharama Rao, Deputy Secretary, C and B, PWD and Sri H.G. Hanumaiah, Superintending Engineer, Karnataka Health System Development Project) to RITES as per letter dated 1-7-1997. This was served on RITES on 1-7-1997. Instead of selecting one among them within fifteen days, RITES sent letters dated 2-7-1997 and 14-7-1997 categorically refusing to select one from the names in the Contractor's list, contending that the Contractor should select one from the list of names sent by it (RITES). As RITES refused to select one from the Contractor's list, the Contractor by letter dated 16-7-1997, in exercise of its right under the appointment procedure, appointed the second respondent as sole Arbitrator. It would thus be seen that the appointment of the second respondent is strictly in accordance with the appointment procedure and there is no violation.

13. The learned Counsel for RITES contended that the delay on its part in sending the list of three names was very short and as such the delay should have been ignored and the delay did not invalidate its lists. RITES contends that the delay is due to bona fide reasons. But RITES does not dispute the fact that there was a delay on its part in sending the panel of three names within thirty days from the date of receipt of notice. In fact RITES has clearly admitted that there was such delay on its part in sending the panel of names, in para 7.1 of its counter-statement filed before the Arbitrator, which reads as follows:

"The General Manager has forwarded a list of officers to the claimant to choose one of the officers of his selection. It is admitted that there is a delay of one day in sending the list of officers for the claimant's selection, due to the fact that the General Manager is stationed in Delhi and only the Chief Project Manager is heading the Bangalore Unit. . . . Instead of selecting one of the officers from the list, the claimant has taken advantage of the delay and sent a list of three officers to the respondent...".

(emphasis supplied)

14. The appointment procedure is clear and specific. The employer has to send a panel of three names within 30 days from the date of receipt of notice from the Contractor. The 30 days period expired on 29-6-1997. The employer sent the panel only on 1-7-1997. These facts are not in dispute. Whether the delay is one day as contended by RITES or two days as contended by the Contractor, makes no difference. Parties are bound to strictly abide by the appointment procedure. When RITES failed to send its panel within 30 days, the Contractor became entitled to send its panel. The Contractor has therefore rightly sent its panel of names, when the employer failed to send its panel within thirty days. Therefore, the contention of the employer that the delay of one or two days on its part in sending the panel of names to Contractor, has to be ignored, is untenable. The employer having refused to select one from the Contractor's panel and having failed to select one from the panel sent by the Contractor within 15 days of receiving the Contractor's panel, the Contractor became entitled to appoint one from its panel as the sole Arbitrator.

15. RITES next contended that the appointment procedure required that the list of three officers to be sent either by it or by the Contractor, should be officers of the rank of Superintending Engineer or higher, working in RITES. In other words, the employer contends that only one of its officers can be an Arbitrator and not an outsider. We have carefully gone through the arbitration agreement. It does not provide that the Arbitrator to be appointed should be an officer working in RITES. The first part of the appointment procedure states that the employer shall send to the Contractor a list of three officers of the rank of Super-

intending Engineer or higher, who have not been connected with the work under the contract. It does not, however, state that the Arbitrator should be an officer of RITES. Therefore, the contention of RITES that only a serving officer of RITES should be the Arbitrator, cannot be accepted.

16. At all events RITES is deemed to have waived its objections to the appointment of Arbitrator. It did not object to the appointment of the Arbitrator on the ground or error of procedure in appointment or on the ground that he was not a working officer of RITES. Section 4 relates to waiver of objection. It provides that a party who knows that any requirement under the Arbitration Act has not been complied with and yet proceeds with the arbitration, without stating his objection to such non-compliance without undue delay or, if a time-limit is provided for stating that objection, within that period of time, shall be deemed to have waived his right to so object. Section 13 of the Act provides that a party who intends to challenge an Arbitrator shall, within fifteen days after becoming aware of the constitution of the Arbitral Tribunal or after becoming aware of any circumstances referred to in Sub-section (3) of Section 12, send a written statement of the reasons, for the challenge to the Arbitral Tribunal. Section 12(3) provides that an Arbitrator may be challenged if he does not possess the qualifications agreed to by the parties. A combined reading of Sections 4, 13 and 12(3) makes it clear that if RITES wanted to challenge the appointment of second respondent as Arbitrator (either on the ground that he was not an officer of RITES or on the ground that his appointment was not in accordance with the appointment procedure), it ought to have raised it before the Arbitrator in the manner provided in Section 13(2). As it failed to do so, it is deemed to have waived its right to object the appointment of Arbitrator.

17. In this case, RITES not only waived its right to object, but has voluntarily subjected itself to the jurisdiction of the Arbitrator and thereby estopped from challenging the validity of the appointment of the Arbitrator. In para 7.1 of the counter-statement filed by the employer, the employer has subjected itself to the jurisdiction of the Arbitrator, thus:

"The jurisdiction of the learned Arbitrator so appointed by the claimant has since been honoured by the respondent".

In the preliminary written arguments submitted on 12-3-1998, the employer stated thus:

"... Fortunately for us, we have an eminent Arbitrator who is not only a practical engineer but also an administrator. Being a technocrat par excellence, we submit to the Arbitrator to take practical view/prevailing engineering practice coupled with administrative problems encountered in this case, while arriving at his impartial judgment".

In the final written arguments submitted on 8-6-1998, the employer stated thus in the very first para:

... It is submitted that we, the respondents, have not questioned the power and competence of the Hon'ble Arbitrator to pass awards as he deems it fit and appropriate, based on the conditions of contract of the particular work in question nor have we questioned the appointment of the Arbitrator,....".

(emphasis supplied)

18. In view of the above we hold that the appointment of Arbitrator is in accordance with the appointment procedure agreed under the arbitration agreement. Even if there is any violation or irregularity, by subjecting itself to the jurisdiction of Arbitrator, without challenging his appointment, RITES is also barred under the principles of estoppel and waiver from challenging the award of the Arbitrator on the ground that the Arbitrator was not appointed in terms of the appointment procedure. The first point is answered accordingly.

Re: Point (b):

19. RITES contends that though it employed the Contractor and it is the 'employer' under the contract with reference to the Contractor, RITES was getting the construction work executed for the Town Municipal Council and therefore the liability to make payment was that of TMC, Chintamani. It is contended that under Section 230 of the Indian Contract Act, 1872, an agent is not personally bound by the contracts entered into on behalf of the principal, in the absence of any contract to the contrary. In this case, as RITES had disclosed in the tender notice, letter of acceptance and the agreement that it was acting on behalf of the TMC, Chintamani, only the disclosed principal, namely TMC, Chintamani could be made liable for any claim of the Contractor and the employer (RITES) cannot personally be made for any claim of the Contractor. It is submitted that as TMC, Chintamani is not made a party, the claims are liable to be rejected and the award against RITES is liable to be set aside under Section 34.

20. In State of Uttar Pradesh and Anr. v. Murari Lal and Brothers Limited, the Supreme Court has held that the agent is not personally bound by the terms of the contract made on behalf of the principal.

20.1 In Midland Overseas v. M.V. "CMBT Tana" and Ors., the Bombay High Court held that having regard to Section 230, before an agent can be sued, it must be pleaded and shown that the principal is undisclosed and the contract, breach of which is sued on was entered into by the agent as having contracted personally and when the contract is entered by the agent, on behalf a disclosed principal, the agent cannot be sued personally, nor can be made personally liable.

20.2 In Steel Authority of India Limited v. Transworld Marine Limited and Anr., SAIL filed a suit against the principal (Transworld, a Taiwanese company) and agent (Chowgule Brothers) for loss of goods which were entrusted for shipment on account of sinking of the ship. It was held that only the owner of the ship could be sued which was liable and not the agent, having regard to the provisions of Section 230.

21. What is relevant and important is that the principle contained in Section 230 that the agent cannot be personally bound by any contract entered on behalf of principal nor can be made personally liable, is subject to the contract to the contrary. In fact, the section itself gives three instances where presumption of contract to the contrary can be raised viz., (i) where the contract is made by the agent for the sale or purchase of goods for a merchant, residing abroad; (ii) where the agent does not disclose the name of his principal; and (iii) where the principal, though disclosed, cannot be sued. The three instances given are only illustrative and not exhaustive.

21.1 In Durga Prasad Manna Lal v. Cawnpore Flour Mills Company Limited, it was held that the three instances of the contract to the contrary mentioned in Section 230 are by no means exhaustive. In Babulal and Ors. v. Jagat Narain and Ors., it was held that under Section 230, every agent, who undertakes personal responsibility for payment is personally liable and can be sued in his own name on the contract.

21.2 In Sukumari Gupta and Ors. v. Dhirendra Nath Roy Chowdhury and Ors., and in Orissa Textile Mills Limited and Anr. v. Ganesh Das Ramkishun, it was held that the question whether an agent, who has the contract on behalf of his principal, is to be taken to have contracted personally or merely on behalf of his principal, and, if personally, what is the extent of his liability on the contract, depends upon what appears to have been the intention of the parties; and such intention has to be deduced from the terms and nature of the particular contract and the surrounding circumstances and the contract between the principal and agent will also be relevant to find out such intention.

22. An agent is considered as a connecting link between the principal and third parties and has the competency to make the principal responsible to third parties, for his (agent's) actions. If the function of the agent is merely to identify customers/purchasers or bring about contracts between the principal and persons intending to avail services or purchase goods, from the principal, thereby creating a privity of contract between the principal and third parties, the agent cannot personally be bound to perform such contracts nor made personally liable for non-performance or breach by the principal. Section 230 makes this position clear. But there may be several types of transactions, or contracts, where the agent enters into contracts, either disclosing the principal, or without disclosing the principal, or without even disclosing that he is acting in the capacity of an agent agreeing, promising or undertaking to perform obli-

gations which clearly disclose an intention to be personally bound by the contracts; and in such cases, irrespective of the fact that the contract is purported to be made on behalf of a disclosed principal, the agent can be sued for breach or non-performance, in his personal capacity.

23. Many a time independent Contractors or management contracts are loosely called as 'agents'. If a Contractor undertakes to achieve a particular result or execute a particular work, by adopting processes or means of his choice and over which he has control, he becomes personally liable both to the employer (principal) as also to the Sub-Contractors whom he employs, irrespective of his disclosing that he is acting on behalf of the employer (principal). Reference may be made to the following passages from Anson's "Law of Contract" (27th Edition):

"As a general rule, two persons cannot, by any contract into which they may enter, thereby impose contractual liabilities upon a third party. This principle may be illustrated by reference to building contracts, where a person (the employer) engages a Contractor to carry out certain building work. The Contractor frequently Sub-contracts parts of the work to Sub-Contractors. A Sub-Contractor has no cause of action against the employer for work done or material supplied under the sub-contract, since the employer is not a party to that contract. Even if the employer has nominated the Sub-Contractor and taken the benefit of the Sub-Contractor's work, it will not be liable to the Sub-Contractor for the price, as there is no privity of contract between them. Conversely the employer has no claim in contract against the Sub-Contractor, since the Sub-Contractor is not a party to the main contract between the employer and the Contractor", (page 430) "Where an agent contracts, as agent, for a named principal, so that the other party to the contract looks though the agent to a principal whose name is disclosed, it may be laid down, as a general rule, that the agent drops out of the transaction as soon as the contract is made. The agent acquired neither rights nor liabilities. But this matter is always one of the proper constructions to be put .... upon the wording of the document and the surrounding circumstances". (pages 648 and 649)

24. We will now examine the terms of contract between RITES and the Contractor as also the terms of contract between TMC, Chintamani and RITES and the surrounding circumstances in this case to find out the intention of the parties as to whether RITES had contracted to be personally liable. In other words we will examine whether there was a contract to the contrary to general rule prescribed by Section 230 of the Contract Act.

24.1 The contract between TMC, Chintamani and RITES as per agreement dated 12-8-1993 discloses the following:

(i) TMC, Chintamani, which wanted to construct a shopping complex under the Integrated Development of Small and Medium Towns Scheme, entrusted to RITES the said work, that is, design, detailed engineering and project management services on turnkey basis. RITES was engaged to provide services for survey, design, detailed engineering and project management of construction complete in all respects, including planning, tendering, contracting, procurement, construction, inspection, site supervision and commissioning of the said shopping complex;

(ii) RITES shall engage main and Sub-Contractors for completing the construction and take single point responsibility for supervision of the construction and quality control, ensuing that construction is carried out in accordance with the approved drawings and specifications;

(iii) RITES shall make progressive payments to the Contractors engaged by it for completion of the construction work and finalise the accounts and close the Contractors engaged for the work;

(iv) RITES shall maintain the building for a period of 6 months after certifying completion and handing over to TMC, Chintamani;

(v) RITES shall be responsible to complete the execution of the work as per completion time schedule and also pay liquidated damages to TMC for delays;

(vi) There was to be no privity of contract between TMC, Chintamani and the Contractors appointed by RITES. However all work orders are to be placed by RITES, on behalf of TMC;

(vii) TMC was not responsible or liable to make any payment directly to any of the Contractors engaged by RITES for the work. On the other hand, TMC had to make available to RITES/adequate resources and funds for proper execution of the work and timely payment to the Contractors and RITES had to make all payments to the Contractors;

(viii) RITES was also entitled to receive and remit to the project account maintained by RITES, all deposits, penalties and liquidated damages received from the Contractors appointed by it for the work;

(ix) TMC had to pay RITES, the build up cost. After completion of the work, RITES had to prepare a detailed statement in regard to various works, contract-wise and expenditure therefor, duly certified by its authorised finance/accounts representative with supporting documents;

(x) The TMC had to pay to RITES 9 1/2 of the final built-up cost and reimbursable expenditure (as detailed in the agreement) as remuneration.

25. We will next refer to the terms of agreement between RITES and the Contractor. Though a power of attorney was granted by TMC to RITES (referred to in Clause 8.4 of the agreement between TMC and RITES) the agreement with the Contractor was not entered either by TMC or TMC represented by RITES as attorney holder. The agreement was entered into by RITES in its own name as employer, no doubt stating that it is entered on behalf of TMC, Chintamani. The general conditions of contract and other annexures forming part of the agreement also show that RITES was the employer and contracting party. The agreement provides that in consideration of execution of work entrusted to the Contractor, the employer (RITES) will pay the respective amounts for the work done, in accordance with the contract. Accordingly, it was RITES, which was making payments to the Contractor and not TMC. In fact when RITES committed breach in paying the bills of the Contractor, and when the Contractor demanded payment of the amount due, RITES never stated that or contended that the Contractor should demand payment directly from the TMC. On the other hand, it wanted the Contractor to wait until the TMC made available sufficient funds to RITES to enable RITES to make payment. This clinches the liability of RITES. We may conveniently refer to the following admissions in the counter-statement and in the written arguments of RITES before the Arbitrator and the documents, in this behalf (Note: 'Respondent' and 'Employer' refer to 'RITES' and client refers to 'TMC'):

Counter-statement:

Para 4.1.--... That RITES is only a consultancy organisation executing the work on behalf of the client and all the payments can be released by RITES to the claimant only on receipt of funds from the client. Since there were some delays in the release of the payment by the client, RITES could not release the payment to the claimant in time and did not wilfully withhold any payment due to the claimant on its own.

Para 8.1.--As explained in para 4.1, it had admitted that the respondent has to make payments to the claimant which were not released due to the fact that the respondent had not received the payments from the client. ... The details of the payments to be released to the claimant are as under ...(Total Rs. 38,49,292.96) Para 8.2.--... As such the payments due to the claimant shall be released promptly on receipt of the payment from the client. It is once again submitted that there is no wilful delay on the part of the respondents i.e., RITES and the delay is beyond the control of RITES. The learned Arbitrator is requested to take a lenient view on the subject issue.

Para 10.1.--...The respondent has made every possible attempt to get the funds released from the client to ensure prompt payment to the claimant. The delay is solely due to non-release of funds by the client".

In written arguments dated 12-3-1998:

" ... It is submitted that the payment will have to be made to the claimant only after receipt of the money from the client i.e., Town Municipal Council... It is once again submitted that at no stage RITES were against release of payments for the legitimate work done by the claimant and RITES will be too glad to release the same provided funds are made available by TMC. Since there has been delay in releasing payments by TMC from Running Bill 10 onwards, RITES could not release payments to the claimant against the RA and price adjustment bills submitted by the claimant".

In written arguments dated 8-6-1998:

"The claim of the respondent that payment due to the claimant towards the work will be released when we receive the payment from the client is relevant because the contract was entered between the claimant and respondent on behalf of TMC and respondent is only a construction Management Agency".

Clause 58(3) of General Conditions of Contract:

"Payment to the Contractor of the amount due under each of the interim payment certificates issued by the engineer shall be made by the employer within 15 days of such certificate being delivered to the employer".

Para 3 of the agreement between RITES and Contractor:

"In consideration, of the due provision, execution and completion of the said works, the employer does hereby agree with the Contractor that the employer will pay to the Contractor the respective amount for the works actually done by him at the 'Rates' as contained in appended bill of quantities (Vol. II) and such other sums as they may become payable to the Contractor under the provisions of the contract in such manner as provided for in this agreement".

26. It is evident RITES obtained a turnkey project management contract from TMC, Chintamani. The project management contract between the TMC and the RITES makes it clear that the RITES had undertaken the responsibility of the planning, constructing and delivering the project [shopping complex] with discretion to select the Contractors and pay the Contractors in consideration of the TMC reimbursing the entire cost of construction plus 9 1/2%. In other words, the RITES was the project management Contractor for the TMC and the first respondent-Contractor was virtually a Sub-Contractor for the RITES. There was no privity of contract between TMC, Chintamani and the Contractor. Even after the disputes were referred to arbitration, RITES continued to say that it will pay the amount due, but never said that the Contractor should recover the amount due from TMC, Chintamani. Therefore, even though RITES disclosed that it was entering into the contract on behalf of TMC, it is not absolved of its liability towards the Contractor. Nor is the Contractor enabled to sue TMC, Chintamani directly by the terms of the contract.

27. Having regard to the terms of the contract and the surrounding circumstances, it is clear that the Contractor could sue only RITES and not the TMC. Therefore, the case is not covered by the rule contained in Section 230 of the Contract Act, as a contract to the contrary is established. We, therefore, hold that the failure on the part of Contractor to implead the TMC as a party to the proceedings does not affect the claim or the arbitration proceedings or the award. The Contractor was justified in suing RITES as it is personally liable.

Re: Point (c):

28. Out of 18 claims made by the Contractor, the Arbitrator has rejected claim Nos. 8, 9 and 14. The claims which have been allowed fully or partly can be broadly classified as follows:

(a) Claims for release of payments for work done and retention money (claim Nos. 1 and 2);

(b) Claims for equitable rates and price adjustments in terms of the general conditions of contracts-

(i) Where the quantity of work exceeds the scheduled quantity by 30% (claim No. 4);

(ii) When the quantity of work falls below the scheduled quantity by 30% (claim No. 5);

(iii) Where there are extra items (claim No. 6); and

(iv) Where there is substantial change in the scope of work (claim No. 7);

(c) Claims for compensation for idle men, machinery, overheads, extra insurance and redeployment of men and machinery (claim Nos. 10, 11, 12 and 15), as a consequence of breaches by RITES;

(d) Claim for reimbursement of increased sales tax recovered (claim No. 13);

(e) Claim for interest (claim Nos. 1 (part), 3, 16, 17 and 18).

RITES have challenged the award on all these items.

29. The Arbitrator has made a reasoned award. On the basis of pleadings and evidence, the Arbitrator has recorded the following findings of fact:

(a) The contract was entered into between the RITES and the Contractor, and therefore RITES is bound to fulfill the contractual obligations. The RITES was liable to pay the amount due for the work done by the Contractor as per several bills. RITES committed breach by failing to pay the amounts due under the running bills/price adjustment bills/extra item bill submitted by the Contractor for the work done. RITES was also liable to refund the retention money and release bank guarantee;

(b) The RITES committed breach by failing to make available the entire site, drawings etc., and RITES terminated the contract prematurely;

(c) The Contractor was entitled to equitable rates and price adjustments in regard to quantities exceeding or falling short of permissible limit of 30% under Clause 52(3) read with Clause 68(1) of the General Conditions of Contract; in regard to extra items of work under Clause 52(4) read with Clause 68(1); for variation in the scope of work, under Clause 51(1)(d) of the General Conditions of Contract;

(d) The Contractor was entitled for compensation for idle men, machinery, additional overheads and additional insurance charges;

 (e)    RITES was liable to refund the excess sales tax collected; 
 

 (f)    The Contractor was entitled to interest at 18% per annum on amount awarded (other than award of interest under claim Nos. 1(b) and 3 from 21-10-1997 to date of award.

30. Each and every one of these findings is based on the terms of the contract, admissions made by RITES in its statement of objections and written arguments filed before the Arbitrator and the documentary evidence exhibited by the parties. A perusal of the statement of objections and written arguments of RITES shows that it has admitted the following:

(a) That it had not paid the running bills and price adjustment bills to the Contractor, as required under the contract;

(b) That the quantities of several items work have exceeded the permissible limits (that is plus or minus 30%) and therefore the Contractor was entitled to price adjustment/equitable rates;

 

 (c)    That the Contractor was required to do extra items of work not specified in the tender schedule; and 
 

 (d)    That there was change in the scope of certain part of the work. 
 

 (e)    That there was delay on its part in making available portions of the site and providing proper access and that it had terminated the contract before completion of the work.

The Arbitrator has merely given his finding on the basis of the admissions and documentary evidence and has quantified the amount by giving the calculations in the annexures to the award. He has awarded interest in accordance with Section 31(7) of the Act.

31. Even under the old Act (Arbitration Act, 1940) the award could be challenged only on limited grounds. Dealing with the scope of interference by Courts, in regard to awards of Arbitrators, a Division Bench of this Court in Government of Karnataka v. Mahalinga Shetty and Ors., stated the principle thus:

"An Arbitrator is a Judge of the choice of the parties. A decision by an Arbitrator is not susceptible to interference by the Civil Courts except on special grounds. An erroneous decision, as the Civil Court may conceive it, does not by itself justify interference. The Civil Courts do not sit in judgment over the awards of Arbitrators as if in an appeal. Evidence accepted and acted upon by the Arbitrator cannot be re-appreciated by the Civil Court, so as to enable it to substitute a conclusion of its own in place of the one reached by the Arbitrator. An award can, of course, be interfered with provided the award is vitiated by misconduct; or suffers from an error of law apparent on the face of the award. The error of law must be manifest and self-evident and one which is apparent on the face of the proceedings".

In State of Rajasthan v. Puri Construction Company Limited and Anr. and in B.V. Radha Krishna v. Sponge Iron India Limited, the Supreme Court has held that the Arbitrator is the final Arbiter for disputes between the parties. It is not open to challenge the award on the ground that the Arbitrator has drawn his own conclusions or failed to appreciate the facts. Courts cannot substitute its own evaluation on the conclusion of law or fact. Court cannot examine the reasonableness of the reasons. The Arbitrator is the sole Judge of the quality and quantity of evidence and it will not be for the Court to take upon itself the task of being the Judge on the evidence before the Arbitrator. High Court cannot examine matters as a regular Appellate Court and substitute its own view in place of Arbitrator's view.

32. Under the old Act, the award could be challenged on the ground that there was an error apparent on the face of the award or on the ground that the Arbitrator had misconducted himself by giving inconsistent conclusions, or by ignoring the provisions of law or by making an award in the absence of any evidence or by completely ignoring the material evidence. But, those grounds for interference are not available under the 1996 Act. An award can be challenged only on the grounds enumerated in Section 34 of the new Act. The Supreme Court in Olympus Superstructures Private Limited v. Meena Vijay Khetan and Ors., has recognised that the scope of the provisions for setting aside an award under Section 34 of the Arbitration and Conciliation Act, 1996 is far less than the scope under Sections 30 and 33 of the Arbitration Act, 1940.

33. The appellant has not been able to make out any of the grounds available under Sub-section (2)(a)(i) to (v) or (2)(b)(i) of Section 34 to interfere with the award. The question therefore is whether the award is opposed to or in conflict with the public policy of India and therefore falls under Section 34(2)(b)(ii) of the Act.

34. The term 'Public Policy of India' is not defined in the Act, though they are used in Sections 34(2)(b)(ii) and 48(2)(b) of the Act. In Central Inland Water Transport Corporation Limited and Anr. v. Brojo Nath Ganguly and Anr., the Supreme Court observed that public policy connotes matters which concern the public good and public interest and it may vary from time to time. In Renusagar Power Company Limited v. General Electric Company5, the Supreme Court considered the scope of the term 'public policy' exhaustively with reference to enforcement of foreign awards and held that enforcement of an award would be refused as being contrary to public policy if it was contrary to (i) fundamental policy of Indian Law; or (ii) the interest of India; or (iii) justice or morality.

34.1 In Kolaparti Venkatareddi v. Kolaparti Peda Venkatachalam, the Andhra Pradesh High Court attempted the following definition:

"The term 'public policy' does not admit of any definition. It is a variable quantity, which must vary and does vary, with the habits, capacities and opportunities of the public .... What is the policy of the public at one time may not be a sound public policy at another time ... broadly it is equivalent to the 'policy of the law'. It is applicable to the spirit as well as the letter. Whatever tends to injustice of operation, restraint of liberty, commerce and natural or legal right; whatever tends to the obstruction of justice or to the violation of a statute and whatever is against the good morals...".

34.2 In Deutshche Schachtbau-Und Tief Bohrgesellchaft MBH v. Ras Al Khaimah National Oil Company, the Court of Appeal held:

"Considerations of public policy can never be exhaustively defined, but they should be approached with extreme caution. .... It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good, or possibly that enforcement would be wholly offensive to the ordinary, reasonable and fully informed members of the public on whose behalf the powers of the State are exercise".

34.3 Black's "Law Dictionary" aptly defines 'public policy' thus:

"Broadly, principles and standards regarded by the legislature or by the Courts as being of fundamental concern to the State and the whole of society -- also termed policy of the law".

34.4 In Shri Sitaram Sugar Company Limited and Anr. v. Union of India and Ors., the Supreme Court (in some other context) observed that all decisions, whether legislative, administrative or quasi-judicial, must be in harmony with the Constitution and other laws of the land.

34.5 Judicial pronouncements in India on the scope and limitations of these words with reference to interference with Arbitral Awards in Domestic Arbitration are still in nascent stages. We may however proceed on the basis that 'Public Policy of India' for purposes of Section 34, refer to the principles and standards constituting the general or fundamental policy of the State, established by the Constitution and the existing laws of the country, and the principles of justice and morality.

35. RITES has not been able to make out that the award is in conflict with public policy of India. Nor has RITES made out any other ground mentioned in Sub-section (2)(a) or (2)(b) of Section 34. It is, not permissible for the Court exercising power under Section 34 of the Act or this Court in an appeal under Section 37 of the Act, to examine the correctness or validity of the award on any ground other than what is specified in Section 34. Therefore, the challenge to the award on the ground that it is erroneous, is liable to be rejected.

36. There is no merit in this appeal and the appeal is accordingly dismissed. Parties to bear their respective costs.

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Karnataka High Court